As Conflict Escalates in Libya, the Economy Veers Toward Crisis

“I have tried to avoid a war of words with the Central Bank of Libya, but things really have crossed all lines,” an exasperated Prime Minister Fayez al-Serraj announced in a public address on April 8. Serraj heads the Tripoli-based Government of National Accord, one of two rival governments vying for control of the country. While Libya’s intensifying civil war and the coronavirus crisis occupy the few headlines the country garners, coverage is scant on the country’s economy, which is in increasing peril — and, as Serraj’s address shows, it plays a prominent role in the country’s complicated schism. Meanwhile, the economic situation in the east — the seat of the rival “interim government” and leading elements of the parliament — is even more dire and will likely be exacerbated by attempts to install military rule. The latter may force the Government of National Accord into tough decisions over whether it can continue to send funds to the east — funds that may go directly into the coffers of the forces it is fighting in Tripoli. The issues that the bankers and the politicians are fighting over are complex, representing the extent of dysfunction in Libya’s bifurcated system of governance, but they may well play a decisive role in the trajectory of the conflict.

The current economic trajectory is not sustainable for either of the warring coalitions, and there is infighting among both of them over how to respond. Fragmentation is perhaps the best single-word description of the situation in Libya, where defining groups and interests in overarching terms is increasingly difficult in the midst of the third bout of civil war since 2011, and since rival governments emerged in 2014. The UN-backed Government of National Accord, formed in 2016 in the wake of an internationally mediated political deal, is based in Tripoli. But it is an amalgam of individuals rather than a coherent actor capable of collective action. In the east are the House of Representatives, which despite its chronic divisions is recognized by the international community as Libya’s legislature, and the Interim Government, which lacks international recognition. A rival House of Representatives faction is now operating from Tripoli. Since April 2019, the Government of National Accord and its allies — an assortment of armed groups from western Libya — have been unified by their struggle against Field Marshal Khalifa Haftar, the commander of the Libyan Arab Armed Forces, which have laid siege to Tripoli. Haftar’s alliance comprises an array of armed groups predominantly from eastern Libya, but also some from the south and west of the country. In theory, the field marshal is accountable to the eastern-based House of Representatives and the Interim Government, but he is not in practice.

Despite an international conference taking place in January to re-launch a political process, Libya’s conflict has escalated. Increasingly, both camps are reliant on support from significant numbers of foreign fighters. External backers — the United Arab Emirates, Egypt, and Russia in terms of military support for the Libyan Arab Armed Forces, and Turkey for the Government of National Accord — are meddling with increasing lethal impact. In Tripoli, civilians seeking to shelter themselves from the pandemic have been subject to widespread indiscriminate attacks on civilian areas by Haftar-led forces, whom the UN holds responsible for 81 percent of civilian deaths in the first quarter of 2020. Hospitals have been hit by the Libyan Arab Armed Forces repeatedly, while water cut-offs and electricity blackouts have compounded the misery. Forces aligned with the Government of National Accord have been accused of implementing a “siege” of the city of Tarhuna and of cutting the city’s electricity supplies. Both rival authorities are woefully ill-prepared to respond to the threat of the novel coronavirus.

Internal Fissures in the Government of National Accord Alliance

The Government of National Accord has failed to become the unity government it was envisaged to be when it was formed in 2016. Now it must contend with the conflict, craft a response to the novel coronavirus, and deal with a mounting economic crisis. The Libyan Arab Armed Forces (citing grievances of eastern tribes) imposed an oil blockade of the eastern oil ports in January that has starved Libya’s state revenues, costing over $4.35 billion according to National Oil Corporation numbers. This has led the governor of the Central Bank of Libya in Tripoli, Sadiq al-Kabir, to call for austerity measures and the devaluation of the Libyan dinar to limit the impact upon the state’s financial reserves. Kabir refuses to clarify the size of Libya’s reserves; however, the Audit Bureau has assessed reserves at just over $60 billion and has forecasted that they may be reduced by $10 billion this year as a result of the 2020 fiscal deficit. The Government of National Accord’s Prime Minister Fayez al-Serraj has taken the opposite approach, announcing 575 million dinars (roughly $410 million) in combined funding for the coronavirus response without describing a coherent strategy as to what the funding was for, and who would get what. Serraj also called on the Central Bank to open up letters of credit for the import of goods in order to respond to the crisis.

Serraj and Kabir have publicly traded barbs in defense of their respective positions, with the prime minister devoting much of a 40-minute address to Libyans to air his grievances. Serraj also called for a board meeting of the Central Bank to be arranged in order to push through necessary reforms, which he accuses Kabir of blocking. This was a shot across the bow. A meeting of the Central Bank board — which has not met since the government split in 2014 — has the potential to unseat Kabir, but also to allow for an open competition over who should succeed him. The Central Bank has long been a key battleground, and the Government of National Accord could lose its privileged access if the new governor was more amenable to the eastern-based authorities, who have sought to remove Kabir in the past. In response to the threat of a board meeting (and potential unseating), Kabir has backed down and opened up a limited number of letters of credit to allow for imports for food and medical purchases without a change in the exchange rate from Libyan dinars to dollars. While the Central Bank governor is right to question the Government of National Accord’s lack of preparedness (as he has done in a series of letters), Serraj is also right to point out that the governor is overstepping his mandate.

But the market does not appear convinced by the moves agreed on by Serraj and Kabir thus far: Speculators are anticipating a worsening of the monetary crisis. A steep increase in the exchange rate for the dollar on the black market indicates that there is insufficient access to foreign currency, even though some banks may have been resorting to the black market anyway. To insulate himself from criticism, Serraj has escalated his demands by requesting that Libyans over the age of 18 be able to purchase up to $5,000 at a reduced exchange rate. This would cost as much as $20 billion at a time when the demands on the Central Bank’s hard currency reserves are already extensive and there is no foreign exchange income from oil.

The ongoing role played by armed groups in the capital further complicates the rift between the Government of National Accord and the Central Bank. Minister of Interior Fathi Bashagha’s attempts to rein in and reform the capital’s armed groups have exacerbated mutual enmity. In recent weeks, these groups have released an exposé on Bashagha, who is now embroiled in another battle with the Audit Bureau. While Bashagha has made progress, however, the control of those armed groups over the territory in Tripoli that houses Libya’s institutions gives them significant leverage in determining who rules major institutions. Attempted changes to the Central Bank’s leadership would not only politicize the sovereign institution at a critical time, it could also trigger a conflict amongst the groups aligned under the Government of National Accord.

Rifts in the East

The situation is shifting in the east of the country, where rival institutions report to the unrecognized Interim Government and where Haftar has wielded extensive, but not absolute, power. Haftar gave a speech on April 27 in which he claimed a popular mandate for military rule. Yet, a military takeover has not yet transpired: Negotiations are apparently ongoing between Haftar and his civilian counterparts over the shape of future governance, so it is difficult to know what this means in practice. Those who contend that Haftar is seeking to establish an authoritarian system of government under his leadership are vindicated by Haftar’s now stated intent to install military rule. Meanwhile, Haftar’s supporters’ contention that the field marshal is subject to civilian oversight has been clearly undermined.

The motivations behind Haftar’s announcement of the intent to install military rule are unclear, too. Notably, Haftar’s plans emerged as the speaker of the House of Representatives, Agila Saleh, was publicizing his own political roadmap. Haftar likely saw this roadmap as a threat because it could weaken his pre-eminent position in any political negotiations.

But it is also clear that the economy in the east is struggling, and this may also prove a factor down the line as it becomes more difficult for the Libyan Arab Armed Forces to fund its operations. The head of the Central Bank branch in the eastern city of al-Bayda, Ali al-Hibri, warned in a letter on March 9 that he was unable to extend further credit to the Interim Government. Until now, the Interim Government has fused revenues from an annual budget settlement with Tripoli with the issuance of over 32 billion dinars (roughly $23 billion) of debt in the form of bonds to pay salaries and finance its spending. The bonds were initially sold directly to three banks headquartered in the eastern region. However, when the Interim Government was unable to repay the banks, the Central Bank Bayda bought the bonds off the banks and restructured the loans with the Interim Government.

Up until now, Central Bank Bayda has capitalized its bonds by creating credit lines for the three banks headquartered in the eastern region. This allows those banks to issue checks against the credit lines. Yet, there are two problems that have emerged: First, these accounts only work for Libyan dinars and cannot be used to access foreign currency through the Central Bank in Tripoli. This is critical because access to foreign currency is necessary for the import of goods from external markets, upon which Libya is heavily dependent. The Central Bank in Tripoli, realising that that the Interim Government was underwriting itself through debts to these banks, has ensured that only deposits in the Central Bank Tripoli can be used to access foreign currency. As a result of the Central Bank Tripoli’s policies, the credit provided by Central Bank Bayda to those banks’ accounts cannot be used for this purpose. This in turn means that their commercial clients are increasingly unable to access the foreign currency they need to import goods. Second, these eastern banks are unable to access the Central Bank Tripoli’s electronic payment system for check clearing, which is leading to a build-up of checks getting stuck in the system.

To navigate the foreign exchange issue, the eastern banks have been cross-lending with other banks. But this approach has now run aground as other banks are becoming more protective. This means that the funds held by eastern banks from checks drawn on Central Bank Bayda accounts are increasingly a burden. Moreover, the need for commercial customers to shift their deposits to the west of the country in order to access foreign exchange risks creating a liquidity shortage in the east. To date, the Central Bank East has printed as much as 14.5 billion dinars (roughly $10 billion) of currency in Russia to cover its shortage of banknotes in order to pay wages and interest on the debt it is accruing. The Central Bank in Bayda will have to print more unless something changes. Given these developments, Hibri appears reluctant to issue more credit to the eastern banks, hence his announcement that the eastern-based authorities cannot expect further funds to be mobilized beyond those required for salaries.

Given that a third of Central Bank East funds were allocated to the Libyan Arab Armed Forces between 2016-2018, it is reasonable to ask what that means for Haftar’s offensive and announcement of military rule. It is also notable that Saleh, the speaker of the eastern-based faction of the House of Representatives, made an abortive (yet failed) attempt to replace Hibri with someone more likely to keep the credit lines open in recent weeks. Hibri now appears to be out of the country, raising questions over what will happen with the Central Bank in Bayda. Whatever the result of negotiations between Haftar and his civilian counterparts in the east, securing operating funds will be high on the agenda once they have settled upon a governance structure.

How Long Can It Continue Like This?

This is the key question. Despite the threat of the pandemic, Haftar remains committed to his offensive on Tripoli, continuing to target civilians in the process. The oil blockade the Libyan Arab Armed Forces maintains also has the potential to bring about economic collapse. A military takeover in the east will likely mean more money being allocated to Haftar-led forces. This in turn will likely lead to a hardening of attitudes in Tripoli against providing economic relief to the east, as it will fear simply providing further funding to its adversaries.

The only way around these threats for eastern-based authorities and Haftar (while there remains a distinction between the two) is to secure oil sales that bypass Tripoli. Attempts to do this have been ongoing, but have been rebuffed up until now by the international community. Low oil prices and a surplus of supply in the global market also mean that the demand for Libyan oil will remain limited. This is likely to make it hard to find buyers who are willing to accept increased risk. However, if authorities associated with Haftar were able to open up dollar accounts or sell that oil, it would be a gamechanger and could provide for the establishment of a new economic system that operates in areas under the control of the Libyan Arab Armed Forces. In any case, something will have to change relatively soon for eastern-based authorities to ride this out.

With greater reserves through the Central Bank in Tripoli, the Government of National Accord may believe it can stare down Haftar and force him into concessions like lifting the blockade. But the Government of National Accord may not have as much time as it thinks. It will become increasingly difficult to sustain such major dips into the reserves to cover salaries let alone emergency COVID-19 spending. Prospects for replenishing reserves with resumed oil exports at drastically reduced global oil prices are poor, and inflation is likely to rise further: A market assessment found that 18 of 21 Libyan cities suffered food price spikes in April. The tug of war between Serraj and Kabir will continue. These trends are a recipe for a sustained economic and monetary crisis.

Tim Eaton is a senior research fellow with the Middle East and North Africa Programme at Chatham House, where he focuses on the political economy of the Libyan conflict. He is a co-author of a new Chatham House report which explores the development of Libyan armed groups since 2014.